Global Legal and Professional Services Overview of the British Virgin Islands Economic Substance Requirements Legislation requiring a “legal entity” conducting “relevant activity” to report and maintain economic substance has been introduced in the British Virgin Islands. The Economic Substance (Companies and Limited Partnerships) Act, 2018 came into force on 1 January 2019 and was subsequently amended by the Economic Substance (Companies and Limited Partnerships) (Amendment) Act, 2019 (together, the “ES Law”). A draft Economic Substance Code (“ES Code”) was published by the British Virgin Islands International Tax Authority (“ITA”) on 23 April 2019. This advisory provides an overview of key aspects only and we would be happy to advise in further detail if required. The British Virgin Islands is a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) and enacted the ES Law in response to requirements for geographically mobile activities to have economic substance developed under BEPS Action 5, consistent with the European Union timeframe to have such requirements in place on 1 January 2019. Similar legislation is being enacted in all OECD-compliant jurisdictions with no or nominal tax, including Bermuda, the Cayman Islands, Guernsey and Jersey. The ES Law and ES Code were published following consultation with the OECD, the EU and British Virgin Islands stakeholders. International standards are continuing to develop and it is anticipated that the ES Law and ES Code will evolve and be subject to further clarification. Scope The ES Law requiring a “legal entity” conducting “relevant activity” to report and maintain economic substance has been introduced in the British Virgin Islands. A “legal entity” which does not conduct “relevant activity” is required only to submit notifications to the International Tax Authority. An entity which is not a “legal entity” is out of scope and has no obligations under the ES Law. What is a “legal entity”? All British Virgin Islands companies, registered foreign companies, British Virgin Islands and foreign registered limited partnerships (except limited partnerships which do not have legal personality) are “legal entities” unless excluded as set out below. An entity which is tax resident in another jurisdiction is also excluded from the definition of “legal entity” (so long as that other jurisdiction is not on the EU list of non-compliant jurisdictions). It is acknowledged that some jurisdictions (for example, the US) impose tax by reference to a criterion other than residence. What matters is whether the tax authority in the jurisdiction in question has accepted that the entity (or its participators in the case of a transparent entity) is chargeable to tax on its worldwide income. >> Global Legal and Professional Services Trusts and other forms of purely contractual arrangements (including limited partnerships without legal personality) are not “legal entities”. What is a “relevant activity”? Each of the following activities, which have been identified by the OECD as “geographically mobile” is a “relevant activity” as defined further in the ES Law. (a) banking business; (b) distribution and service centre business; (c) finance and leasing business; (d) fund management business; (e) headquarters business; (f) holding business; (g) insurance business; (h) intellectual property business; and (i) shipping business. A legal entity will be treated as carrying on a relevant activity in the British Virgin Islands during any financial period in which it receives income from that activity. A “legal entity” that conducts more than one “relevant activity” is required to satisfy the ES Test in relation to each relevant activity. Investment funds, although not carved out from the definition of “legal entity”, are not regarded as conducting relevant activity. Please see the appended schedule for further details of the relevant activities (and the corresponding CIGA). The ES Requirements A legal entity that conducts a relevant activity must satisfy the economic substance requirements (“ES Requirements”) in relation to that relevant activity. A legal entity satisfies the ES Requirements if it: (a) conducts core income generating activities (“CIGA”) in the British Virgin Islands; (b) the relevant activity is directed and managed in an appropriate manner in the British Virgin Islands; and (c) having regard to the nature and scale of the relevant activity: (i) there is an adequate amount of expenditure incurred in the British Virgin Islands; (ii) there are physical offices or premises as may be appropriate for the CIGA; (iii) there are an adequate number of suitably qualified employees in relation to that activity (whether or not employed by the legal entity or by another entity and whether on temporary or long-term contracts) who are physically present in the British Virgin Islands; and (iv) where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the British Virgin Islands. Further details of the relevant activities and the corresponding British Virgin Islands CIGA are set out at the end of this advisory. >> Global Legal and Professional Services Reduced ES Requirements for pure equity holding entities A legal entity that is only carrying on a relevant activity that is the business of a pure equity holding entity is subject to reduced ES Requirements which are satisfied if the legal entity confirms that it has complied with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017; and has adequate employees in the British Virgin Islands and premises for holding equity participations and, where it manages those equity participations, has adequate employees in the British Virgin Islands and premises for carrying out that management. Application of the ES Requirements to “intellectual property business” and to a “high risk IP legal entity” A legal entity which does not conduct the specified CIGA corresponding to “intellectual property business” is presumed not to conduct CIGA unless it can satisfy the ITA that specified activities involving the taking of certain strategic decisions and risk management and trading activities are carried on in the British Virgin Islands. Further, a legal entity which conducts “high risk intellectual property business” is presumed not to conduct CIGA unless the legal entity can demonstrate that there was a high degree of control over the development, exploitation, maintenance, protection and enhancement of the intellectual property asset, exercised by suitably qualified employees of the legal entity who are physically present and perform their functions within the British Virgin Islands and who are on long-term contracts. In either case, the legal entity will need to provide sufficient specified information to the ITA to rebut the presumption that it is not conducting CIGA. We would be happy to advise on the meaning of “high risk IP business” and the evidential threshold, if required. Core income generating activities (“CIGA”) CIGA means the activities that are of central importance to a legal entity in terms of generating relevant income and which, if conducted, must be conducted in the British Virgin Islands. The examples of CIGA are not mandatory or exhaustive, so a “legal entity” need not perform every element of CIGA listed for the “relevant activity”. Directed and managed It is the relevant activity, as opposed to the legal entity, which must be directed and managed in the British Virgin Islands. However, according to the ES Code, where the legal entity’s only business is the relevant activity or activities in question, then that will mean that the entity itself must be directed and managed from the British Virgin Islands. For the relevant activity to be directed and managed from the British Virgin Islands, there must be an adequate number of board meetings held in the British Virgin Islands having regard to the nature of the relevant activity and its importance in the overall business of the legal entity. For a board meeting to be held in the British Virgin Islands there must be a quorum of directors physically present in the British Virgin Islands. The directors of the legal entity attending such meetings must include among their number adequate expertise to direct the relevant activity. Decisions of the board regarding the relevant activity must be minuted, and minutes of those decisions must be kept in the British Virgin Islands. What is “adequate” and “appropriate”? The meaning of the terms “adequate” and “appropriate” are not defined for the purposes of the ES Law. The ES Law and ES Code do not prescribe a minimum number of full time employees for a particular level of relevant income either generally or for or any particular type of relevant activity (although the ES Code does set out how the number of employees engaged in a relevant activity shall be computed). The ES Code acknowledges that businesses come in different sizes, and the employees, expenditure and premises which are adequate or appropriate for a small business will not suffice for a large business. The ES Code also confirms that it is not the function of the legislation to require an entity to incur more expenditure or engage more employees than it really needs. Outsourcing A legal entity may satisfy the ES Requirements by outsourcing the conduct of its British Virgin Islands CIGA to another person in the British Virgin Islands provided that the legal entity is able to monitor and control the carrying out of the British Virgin Islands CIGA. >> Global Legal and Professional Services Timing A legal entity which carries on a relevant activity during any financial period must comply with the ES Requirements in relation to that activity. For a company or limited partnership incorporated or formed on or after 1 January 2019, a financial period shall be such period of not more than one year from the date of incorporation or formation. For a legal entity in existence prior to 1 January 2019, such period must commence no later than 30 June 2019.